Gap Insurance Explained

Just what is Gap insurance?

It’s Guaranteed Asset Protection insurance. There you go…clear, simple and easy eh?

No.

It’s a bit more complicated than that. I know, unusual for an insurance product but what can I say…

Although there are some variations, in the main, Gap insurance seeks to fill the shortfall that may occur between the value of your car and the amount you may receive from an insurance company if your car is written off.

“What shortfall” I hear you cry…

It’s a fair question. It is a common belief that when you take out car insurance the question about “How much is the vehicle worth” has a bearing on how much you are likely to be paid if your car is written off. Invariably, this is not the case and it is more likely that the value you give will have more influence on the premium charged than the amount that you will get after a major accident. (Do not, however, fabricate the value of your vehicle in order to get a lower premium, this is a very bad thing to do and may invalidate the insurance and even lead to proceedings for fraud!)

If your car is written off, in the vast majority of cases, you will be offered the “market value” of the vehicle. This can be a contentious figure, and if you find yourself in this position, you should never be shy in questioning the insurer as to how they reached their offer and to argue your point if you believe you have a fair one.

The shortfall typically arises, particularly with a new car, when a write off occurs relatively soon after buying the car. I think we all understand that the value of a car declines at its steepest as we drive it, shiny and new, off the forecourt. The “market value” can easily be several thousand pounds less than the price paid new. Gap insurance is designed to dovetail with your comprehensive insurance cover so that the overall payout you receive from both added together is more akin with what you believe will be the replacement cost of the vehicle.

What are the variations of Gap insurance?

Broadly speaking, the different variations of Gap insurance all aim to put you back into the financial position you were before your claim. However, because there are different ways of buying a car, variations have evolved to meet specific needs. Here are the main ones:

 

What are the different types of Gap insurance?

The Gap insurance market can be complex, with different providers offering their own unique products. Some of the most common policies are listed below.

“Return to invoice” Gap insurance

This is straightforward. The Gap insurance will pay an amount that will top up the main insurance payout to the amount that you bought your car for. Unsurprisingly, they will ask for a copy of the invoice.

“Return to value” Gap insurance

Similar to “Return to invoice” but instead of topping up to the amount you paid, “Return to value” will top up to the value of the car at the point of purchase. This can be of benefit if you have had the car a while, but moreso if you bought the car second hand.

“Finance” Gap insurance

This is probably the most basic and common forms of Gap insurance. It aims to help you clear any loans, finance or associated costs in the event of a claim.

“Lease” Gap insurance

If the car is leased and written off, this type of gap insurance is designed to help you pay the remainder of your contract and any early closure fees that may be applied for ending the arrangement early.

“Vehicle replacement” Gap insurance

Instead of paying an amount that will help you get to the figure you originally paid for your car, this is designed to bridge the gap between the main insurance payout and the cost of buying a new car. A lot of dealerships offer this type of product and include cover bor borrowing as well.

 

Should I take out Gap insurance?

As with all insurances, it is down to you to decide whether the cost of the cover and benefits offered are worth what you are being asked to pay for it. The chances are that you will be offered some type of Gap insurance when you buy your car. The best idea, as always, is to read the details of what you are being sold and then shop around to see what is available from the rest of the market.

Gap insurance is something to think about whilst not having an accident
Gap insurance is something to think about whilst not having an accident

Just What Is An Excess?

So Just What Is This “Excess” All About…

Simply put, if your claim is £1000 and you have a £100 excess, then you will receive a payment of £900. If I could leave it at that, this would be a very short post, so lets move on to the “not quite so simply put, but really important you should know” bit

A Tale of Two Parts

The excess on your policy, and it can be any type of policy, is important in two ways. Firstly it effects the premium you pay. All policies will come with a standard (or compulsory) excess that the insurance company feels is appropriate to that particular policy.

From the insurers point of view, the excess acts as a deterrent for small claims and as a way of having another string to their bow when trying to make their premiums more competitive. Typically, on a house insurance policy, the excess may well be around the £100 mark. However, in many cases you may have the opportunity to vary that and choose to have a larger excess in return for a lower premium. 

You need to be careful here, because there are couple of ways this can be done. The easiest is by just varying the excess. The £100 excess becomes a £200 excess and in the event of a £1000 claim you will now get £800. The “are they being a bit sneaky” way, is to take advantage of an insurers option to have a “voluntary” excess. In this scenario, you will be asked if you want a “voluntary” excess and if so how much. You have decided you are happy to have a £200 excess, so tick the “£200” box. What you have actually done is agree to a £200 excess IN ADDITION to the standard £100 excess. Your £1000 claim is now minus both the standard and voluntary excess and you are now looking at receiving £700. Fine if you are aware of that from outset, a little less fine if it comes as a surprise.

The second way an excess influences you policy is more subtle. lets stick with the standard excess of £100 on a contents policy, but instead of a £1000 claim, it is much lower. In theory, you can make a claim of £101 with a £100 excess and get a cheque for £1. I’m taking a guess here that nearly all of you would think submitting a claim that would give you £1 probably isn’t worth it. But where would your cut off point be? You may feel a claim for £140 less £100 is worth it, but a claim of £135 less £100 isn’t. There is no right or wrong here, it is entirely down to how you feel about it. What is true is that the vast majority of people do not make claims that would get them a payment, but, for many reasons, they don’t bother. This is why I say that the amount of an excess on a policy has a real influence on whether you even bother to claim or not.

I Bet You Don’t Have an Excess on Your Policy Anyway…

Hang on a minute, didn’t I previously just write about what the typical excess was on a policy? Yes I did and I am now being a little pedantic. we all refer to the excess being on the policy, it is the way we all talk.

However, in truth, in the majority of cases an excess is applied TO EACH SECTION OF THE POLICY.

Let me give an example, your home is insured and the building is correctly covered for £250k and the contents for £50k. You have a small fire which results in minor damage to the building which will cost £2000 to repair and you lose some possessions which will cost £500 to replace. You believe you have a £200 excess, and you are correct. However, you didn’t know that the excess would be applied to both the Buildings section and the Contents section. This results in your total claim being £2500 minus two lots of £200 and not just the one lot of £200 you were expecting.

In order to avoid this type of misunderstanding, you must read the policy documents and ask questions before any problems occur. It is easy then to make sure you have the cover that you want with the conditions you understand and accept.

My Excess is Higher Than the Value of My Car!?

Yes that can and does happen. Especially to young drivers who can often find that they are subject to an additional compulsory excess on top of the standard compulsory excess. I have seen people under 21, have policies with a compulsory £250 excess plus an additional compulsory “young driver” excess of £400. If they have just spent £600 on their first car, then the slightest knock will write the car off and leave them with nothing.

It really does seem unfair, however it needs to be understood that the value of the car is only a part of what the insurance covers. A 15 year old vauxhall corsa worth £300 can still do a lot of damage to a brand new BMW in an accident. If injuries are involved then the payout can be sky high.

Why is the Excess £1000 or More for Subsidence Claims?

If you have buildings insurance you will see that the excess for claims of subsidence is £1000 or more. Subsidence is when structural damage occurs to your property due to ground movement, often leading to major remedial work having to be undertaken. Claims of this type can run into tens of thousands of pounds and can involve you moving out while the work is done. The much greater excess that is put on subsidence claims reflect the much higher claim value that is inevitable. Although it seems a lot, if you were unlucky enough to have such a claim you would probably feel that £1000 is a small price to pay for such a disastrous event.

Urban Myth…

There is a widespread belief that making a claim will inevitably lead to the premium being increased at the next renewal. While it is almost certainly the case following a car insurance claim where the No Claims discount has not been protected, it is not always the case for home or business insurance.

It’s not the Making of the Claim…

While it is quite legitimate to weigh up whether it is economically worthwhile making a claim or not, please remember that the questions on the insurance application form ask whether you have experienced any incident that could have given cause for a claim. If you do not tell your insurer of any incident for which you could have claimed, then the insurer is within its rights to decline any subsequent claim or just refuse cover.

In Conclusion…

As always, read the terms and conditions of your policy and especially the insurance schedule which will set out the amount of excess for each section.

When getting a quote, play around with different levels of excess that you could comfortably afford in the event of a claim and see what difference it makes to the premium.